June 7 (Bloomberg) -- Iron Mountain Inc. and Equinix Inc.,
two technology companies planning to convert to real estate
investment trusts, plunged after saying that the U.S. Internal
Revenue Service is scrutinizing their eligibility.

The IRS is weighing whether to narrow the legal definition
of real estate for the purposes of converting to a trust, the
companies said in separate regulatory filings.

As businesses from data centers to billboard owners make
the switch to REITs -- which are subject to lower taxes and pay
higher dividends than other companies -- the IRS is considering
whether to restrict the types of enterprises that should
qualify. The review means companies with nontraditional real
estate operations -- like Equinix, which runs data centers, and
Iron Mountain, which rents storage space and maintains paper and
electronic records -- may struggle to win approval.

“If you’re a company with traditional real estate, then I
don’t think you have any trouble creating a REIT out of that,”
Rich Moore, an analyst at RBC Capital Markets in Solon, Ohio,
said in a telephone interview. “If you’re a company who’s got
unusual or a questionable classification of real estate, like
billboards for example, I think you’re going to face more
scrutiny.”

Shares of Boston-based Iron Mountain fell the most since
1998, slumping 16 percent to $28.95. Equinix, based in Redwood
City, California, dropped 5.5 percent to $192.57, the biggest
decline since August 2011.

Outdoor Advertising

Lamar Advertising Co., the Baton Rouge, Louisiana-based
owner of outdoor-advertising displays that also disclosed an IRS
review of its REIT election, declined 4.2 percent to $43.62.

CBS Corp., owner of the most-watched U.S. television
network, is planning for its outdoor-advertising business to
become a REIT. CBS made its submission to the IRS for a ruling
on the conversion in the first quarter, according to a
conference call last month.

Server Warehouses

In the case of Iron Mountain, the IRS is questioning
whether its warehouses filled with stacks of servers constitute
real estate, according the company’s filing with the U.S.
Securities and Exchange Commission.

“Under current legal standards the company’s racking
structures are ‘real estate’ for REIT purposes,” Iron Mountain
said in the filing. “However, the company can provide no
assurances that the IRS will agree.”

Equinix, for its part, defended its data centers as
eligible for REIT status “based on both existing legal
precedent and the fact that other data center companies
currently operate as REITs,” according to the company’s filing.

Lamar said in its filing that based on discussions with the
IRS, it had “no reason to conclude” that it wouldn’t be able
to complete its conversion by Jan. 1 as planned. The IRS has
already deemed billboards real property for purposes of a REIT,
Chief Executive Officer Sean Reilly said at a conference in
September.

Dividend Payouts

To qualify as a REIT, a company has to invest at least 75
percent of its assets in real estate and obtain 75 percent of
its gross income from rents or interest on mortgages from
financing property, according to the National Association of
Real Estate Investment Trusts, a Washington-based trade group.
REITs sell equity and debt to fuel growth, and must return at
least 90 percent of their taxable earnings to shareholders in
the form of dividends.

Two prison operators -- Corrections Corp. of America and
GEO Group Inc. -- began operating as REITs this year. CyrusOne
Inc., a Carrollton, Texas-based data-center company that was
spun out of Cincinnati Bell Inc., will qualify as a REIT this
tax year, according to a regulatory filing.

At best, the IRS review of REIT eligibility will delay some
approvals, and at worst, it may “put some conversions in
danger,” Omotayo Okusanya, an analyst at Jefferies Group LLC,
wrote in a research note.